Amendment in SAST and ICDR in line with the Insolvency Code.

By Rohit Sharma (resolution@vinodkothari.com)

Introduction

That any Act or Statute evolves and gaps in it are removed while the same become effective and is implemented – is a known theory.

With the implementation of the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”) and with passing days of such implementation, the gaps in the Code / linked statutes are being realized and accordingly corresponding amendments are being brought. Read more

Home buyers breathe a sigh of relief

By Vallari Dubey, (resolution@vinodkothari.com)

IBBI amends CIRP Regulations to include claims of other creditors

IBBI has taken a step towards making positive changes in the Insolvency and Bankruptcy Board of India (‘the Code’). The amendments being brought to Regulations pertaining to Corporate Insolvency Resolution Process, provides a relief to home buyers, who are stuck in the depth of undelivered or unfinished houses. With the aid of the amendments, such home buyers can now proceed to file their claims to the Resolution Professional under the Code. Read more

TPP Rules Amended: MCA issues second amendment

The Ministry of Corporate Affairs (“MCA”) vide its Notification No. G.S.R. 1119(E) dated December 7, 2016 issued the Companies (Transfer of Pending Proceeding) Rules, 2016 (‘TPP Rules, 2016’) in exercise of the powers conferred under section 431 (1) and (2) of the Companies Act, 2013 (‘Act, 2013’) read with section 239 (1) of the Insolvency and Bankruptcy Code, 2016 (‘Code’). Read more

Small Companies to be now put on Fast Track Insolvency, by Barsha Dikshit

Insolvency and Bankruptcy Board of India (‘IBBI’) vide notification number IBBI/2017-18/GN/REG 012 dated 14th June, 2017 [1]has come up with Fast track Insolvency regime for small companies by introducing the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (‘Fast Track Regulation’) and has appointed 14th June, 2017 as the enforcement date. On the very same day Ministry Read more

Interpretation of the word “Dispute” – Resolution application by the operational creditors, by Nitu Poddar

For filing application under the Insolvency and Bankruptcy Code, 2016 (IBC), the operational creditor has to serve a prior 10 days demand notice to the corporate debtor. The corporate debtor can either make payment on receipt of such demand notice or bring to the notice of the operational creditor existence of dispute, if any, and record of pendency of the suit or arbitration proceedings filed before the receipt of such notice. In case payment has already been made, the corporate debtor should send back the proof of such payment to the operational creditor.   Read more

Meeting of Committee of Creditors – Insolvency Code , by Nitu Poddar

Practice makes a man perfect and the same practice (read: implementation) makes a law seamless. Insolvency and Bankruptcy Code, 2016 along with its allied rules and regulation is just a year old technically (and around 5 months old effectively) and surely there are gaps which are being detected during implementation. Read more

IBC (Removal of Difficulties) Order

Author: Vallari Dubey

The Government on 24th May 2017 released the Insolvency and Bankruptcy Code (Removal of Difficulties) Order, 2017 making additions in the Eighth Schedule of the Code, which originally amends the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (SICA), in order to clarify the matter in view of the repeal of the Sick Industrial Companies (Special Provisions) Act, 1985, substitution of clause (b) of section 4 of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 and omission of sections 253 to 269 of the Companies Act, 2013. We discuss in detail the order brought and its effect.

Provisions before the Order

The Insolvency and Bankruptcy Code, 2016 (“Code”) came into effect from 28th May 2016 amending the relevant provisions of several existing laws in India in order to modify them in line with the new Code. All such modifications were made in form of different schedules forming part of the Code. One such important amendment is that to the provisions of SICA. Whereby, Section 252 allowed the amendment to SICA to smoothly transfer the proceedings as provided in the Eight Schedule from the purview of SICA to the Code. Accordingly, following has been provided in the Eight Schedule:

“In section 4, for sub-clause (b), the following sub-clause shall be substituted, namely—

 ” (b) On such date as may be notified by the Central Government in this behalf, any appeal preferred to the Appellate Authority or any reference made or inquiry pending to or before the Board or any proceeding of whatever nature pending before the Appellate Authority or the Board under the Sick Industrial Companies (Special Provisions) Act,1985 (1 of 1986) shall stand abated:

 Provided that a company in respect of which such appeal or reference or inquiry stands abated under this clause may make reference to the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 within one hundred and eighty days fromthe commencement of the Insolvency and Bankruptcy Code, 2016 in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016: Provided further that no fees shall be payable for making such reference under Insolvency and Bankruptcy Code, 2016 by a company whose appeal or reference or inquiry stands abated under this clause.””

 Additions made by virtue of the Order

The Order has added two more provisos in addition to the existing ones:

“Provided also that any scheme sanctioned under sub-section (4) or any scheme under implementation under sub-section (12) of section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall be deemed to be an approved resolution plan under sub-section (1) of section 31 of the Insolvency and Bankruptcy Code, 2016 and the same shall be dealt with, in accordance with the provisions of Part II of the said Code: 

 Provided also that in case, the statutory period within which an appeal was allowed under the Sick Industrial Companies (Special Provisions) Act, 1985 against an order of the Board had not expired as on the date of notification of this Act, an appeal against any such deemed approved resolution plan may be preferred by any person before National Company Law Appellate Tribunal within ninety days from the date of publication of this order.”

Impact and Analysis

The first proviso that has been added provides for treatment of a scheme sanctioned under Section 18(4) of SICA and for the purpose of monitoring the implementation of that sanctioned scheme under Section 18(2) of SICA. With the immediate effect of this Order, following shall be effective:

  1. All the sanctioned schemes shall be deemed to be an approved resolution plan under Section 31(1) of the Code.
  2. And for the purpose of monitoring and implementation the same shall be dealt with the provisions of the Code set out to deal with approved resolution plans.

The second proviso provides for changes with respect to appeal. Accordingly, the statutory period within which an appeal was allowed under the Sick Industrial Companies (Special Provisions) Act, 1985 against an order of the Board had not expired as on the date of notification of this Act, an appeal against any such deemed approved resolution plan may be preferred by any person before NCLAT within 90 days from the date of publication of this order.

To understand this arrangement, one shall go back to the provisions of time-limit set out in SICA 1985, relevant extract of which is:

  1. Appeal: – (1) Any person aggrieved by an order of the Board made under this Act may, within forty-five days from the date on which a copy of the order is issued to him, prefer an appeal to the Appellate Authority:

Provided that the Appellate Authority may entertain any appeal after the said period of fortyfive days but not after sixty days from the date aforesaid if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal in time.

 Moreover, the validity of the appeal in the Order is in relation to the date of notification of SICA 2003, which is 25th November 2016.

 The above arrangement is explained in the below mentioned table:

Days to Appeal under SICA 1985 till 1st January Appeal under SICA 1985 Appeal under the Code to NCLAT Time-limit to file appeal with NLAT
Within 45 days Valid Valid Within 90 days of 24th May 2017
Withing 105 days Valid with sufficient cause Valid Within 90 days of 24th May 2017
Beyond 105 days Not valid Not valid N/A

Looking at the intention, it is understandable that a window of 90 days without any further extension has been provided to keep the intention of justice in mind and in the statutory stream, while everything is being transferred to the newly established Insolvency and Bankruptcy Code, 2016.

 

FRDI Bill: Soon to be put into action by Niddhi Parmar

The speed with which the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”) was enacted; the Financial Resolution and Deposit Insurance (FRDI) Bill, 2016 (hereinafter referred to as “FRDI Bill”) will soon see the light of day1 . Both the Code and FRDI Bill is expected to provide a comprehensive resolution mechanism for our economy. In our earlier write-up titled “Financial Resolution and Deposit Insurance Bill: Implications for NBFCs2 ”, we in detailed discussed the implication of FRDI Bill on NBFCs.

Objectives of the Code and FRDI Bill

The Code was drafted by the BLRC3 with an objective to resolve insolvency and bankruptcy on the following grounds:

 Low time to resolution;

 Low loss in recovery;

 Higher levels of debt financing across a wide variety of debt instruments.

The objective with which the Code is enacted is restricted to corporate person and its creditors; however, the objective of FRDI Bill is to provide a holistic remedy for economy. FRDIC provides to pursue following objectives:

 Contributing to the stability and resilience of the financial system;

 Protecting consumers up to a reasonable limit; and

 Protecting public funds, to the extent possible.

Applicability of FRDI Bill

The Code applies to corporate persons (as defined under section 3 (7) of the Code) which does not include financial service provider (as defined under section 3 (17) of the Code). Consequently, financial service providers registered with financial sector regulators do not get covered under the Code. Does this mean that a financial service provider cannot file a case under the Code? The answer is clearly no. Financial service provider can file an application under the Code against the defaulting entity; however, at present there does not exist any comprehensive statute under which an application can be filed if there is a default made by a financial service provider. FRDI Bill intends to provide a specialised resolution mechanism to deal with a bankruptcy situation in banks, insurance companies and financial sector entities.

Intent of FRDI Bill

Lots of questions may arise on the intent of the FRDI Bill. Whether FRDI Bill intends to cover a financial service provider, such as an NBFC whose failure will be insignificant for the economy or too-big-to-fail (TBTF) entities whose failure will not only be significant but will also be dangerous for the economy.

It is pertinent to note that section 227 of the Code empowers the Central Government to notify the financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings to be conducted under the Code. Therefore, the intent of the law seems to exclude the insignificant financial service providers from the purview of the FRDI Bill.

Conclusion

It will be a debacle if small NBFCs and MFIs were to be treated at par with TBTF entities for which the bill is drawn. If potential issues with IDBI are taken at par with a failure to honor its commitments by one of 12000 odd NBFCs in the country, it would defocus the regulators from the issues relating to larger entities.

1 http://www.livemint.com/Politics/gNjoEMQH8Kx8CvI0QyW6YO/Govt-to-table-bankruptcy-law-forNBFCs-MFIs-in-monsoon-sess.html

http://india-financing.com/financial-resolution-and-deposit-insurance-bill-implications-for-nbfcs-byniddhi-parmar/

3 Bankruptcy Law Reforms Committee

_________________________________________________________________________________________________

By Niddhi Parmar :- parmar@vinodkothari.com

Action Plan for NPA Ordinance -Sequel 2, by Vallari Dubey, 24th May, 2017

Complementing the Ordinance on Non-Performing Assets (NPA)[1] which originally brought a whole new breeze in the resolution space in India, RBI has come up with a press release as a further to the first step in crystallizing the concept as laid down in the Ordinance.  RBI has brought a lot of changes for the purpose of implementation of the NPA Ordinance. The Sequel two in the Ordinance story has been released in form of a press release by RBI dated 22nd May 2017, laying down the Action Plan to implement the NPA Ordinance[2].

Points of Action as Tendered

The Action Plan brings forth the relevant steps needed to be taken to arrange for resolution of stressed assets in the Banking Industry. Accordingly, the RBI proposes to set in the following important issues:

Modifications in and re-emphasizing the JLF Mechanism[3]

(i) It has been clarified that a corrective action plan could include flexible restructuring, Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A).

(ii) Amongst the changes being made for the aforementioned proposal, a quantum of changes has been in the JLF Mechanism. In line with the same, a latest notification by RBI has modified the existing quantitative criteria required under JLF mechanism to approve a resolution plan. By virtue of which, following changes have been effected:

Consent required for approval of proposal under JLF
Particulars Before RBI Notification w.e.f RBI Notification
By value 75% 60%
By number 50% 50%

(iii) Such banks who did not give their consent on the proposal approved by the JLF have to either exit by complying with the substitution rules within the stipulated time or adhere to the decision of the JLF.

(iv) Participating banks have been mandated to implement the decision of JLF without any additional conditionality to avoid any kind of red-tapism and fulfill the purpose of Corrective Action Plan under the said mechanism.

(v) The Boards of banks were advised to empower their executives to implement JLF decisions without further reference to them, which is again to avoid any unwanted delay in implementation of the proposal.

Oversight Committee

The Apex Bank proposes to revamp the existing Oversight Committee (OC) which currently comprises of two members only. Where the original committee was formed by the Indian Banks Association (IBA) in consultation with RBI, the reconstituted OC shall be under the direct guidance of RBI and is expected to consist of more members. A larger body shall be able to help dealing with the volume of cases referred to OC, which seems to be beyond those under S4A as required currently.

Resolution Framework under IBC

The most crucial part of the Action Plan is supposedly formulating a formal framework, which was the sole intent behind the original NPA Ordinance. The framework is expected to establish a seamless mechanism to deliberate and take actions to refer cases for resolution under IBC. A committee shall be formed to devise and advise requisite plan and strategy for the matter which shall consist of Independent Board Members.

Rating Assignments

Additionally, RBI through this release of action plan, schemes out the suggestion to include the option of rating assignments. RBI believes that credit rating agencies ought to play an important role in the scheme of things. Rating assignments may help preventing rating-shopping or any conflict of interest that may arise otherwise and also exploring for the possibility for the payment to be made for from a fund to be created out of contribution from the banks and the Reserve Bank.

Unconditional Coordination and Cooperation from Stakeholders

The Reserve Bank notes that the proper exercise of the enhanced empowerment would require coordination with and cooperation from several stakeholders including banks, ARCs, rating agencies, IBBI and PE firms, to which end the Reserve Bank would be holding meetings in the near future with these stakeholders.

Why taking prompt steps is important?

Both the original ordinance and the action plan focuses on the term “stressed assets”. It is very much settled that the problem of bad loans in the country is on its worst. If not now then there probably is no later in this scenario.

Making the law in form of an ordinance and taking prompt steps in its implementation are all evidence of how keen and active the Government has become in clearing the balance sheets of the banks and wiping off stressed assets in the nation.

What numbers say?

A latest report issued by McKinsey & Co. titled, “Mastering new realities – A blueprint to transform Indian banking”, May 2017[4], drills down the case and presents an appalling picture.

According to the numbers presented in the report (See Picture 1), the quantum of distressed loan in the country crossed INR 10 lakh Crores in December 2016.

It further highlights the problem for the public-sector banks (PSBs), where stressed assets have surpassed their net worth. Evidently, current provision levels in the bank are seem to be insufficient to beat the odds, with a gap of nearly INR 600,000 crores between the level of stressed assets and the provisions made. It is believed that as these stressed assets continue to turn bad, the entire equity base of the banks could be at risk.

Picture.1

Source: Mckinsey&Co. Report

Going by the statistics of the report and the comments made thereunder, it is being suggested that if the situation as discussed above, prevails over a period of time from now, the results shall absolutely be disastrous.

This raises fear and makes us realize that we surely have come a long way as far our economy is concerned, but issues as bad as stressed assets in the banking sector may eat up all the hard work along the way for no good reason.

It is indeed direly crucial for the Government to do whatever it takes to pull back the country out of bad loans’ pit fall.

[1] http://www.prsindia.org/uploads/media/Banking%20Ordinance%202017/The%20Banking%20Regulation%20Amendment%20Ordinance%202017.pdf

[2] https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR31388E3F78A130A9405F9891AC490EB2834B.PDF

[3] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/503ACF260214F.pdf

[4]http://www.mckinsey.com/~/media/McKinsey/Global%20Themes/Asia%20Pacific/Mastering%20new%20realities%20A%20blueprint%20to%20transform%20Indian%20banking/Mastering-new-realities-A-blueprint-to-transform-Indian-banking.ashx

The author can be contacted at: vallari@vinodkothari.com